Negative Amortization Checklist

Some adjustable rate mortgages (ARMs) allow for negative amortization. This occurs when your monthly payments do not completely cover the cost of your interest. The extra interest gets added to the principle of your loan. ARMs that allow negative amortization have extra aspects you will want to find out about before committing to the loan. This checklist will provide you with the questions you should ask to get up-to-date on negative amortization issues relating to the ARM you are considering.

1. How is the initial payment calculated? ARMs that allow negative amortization do not necessarily calculate the initial payment using only the initial interest rate. The initial payment may be calculated using the initial interest rate, at the initial interest rate but containing interest only, or at another specified interest rate.
2. What is the payment adjustment period after the initial payment period ends? This is often the same as the initial payment period, but not always.
3. Is there a payment adjustment cap, and if so, what is it? The cap is usually around seven and a half percent per year, if there is a cap.
4. Is there a negative amortization cap, and if so, what is it? ARMs that allow negative amortization always have some sort of limit on how long the negative amortization can last or how large it can get. A common way negative amortization is capped is setting a maximum percentage of the original loan balance, usually 110 percent or 115 percent.
5. Is there a payment recast period, and if so, what is it? Negative amortization can be limited by requiring a periodic recast of the payment amount. A recast works by reconfiguring the payment to be fully amortizing. A recast will use the current balance, interest rate, and remaining period of the loan to calculate the new payment.

These questions should allow you to get a grip on how negative amortization activities work in conjunction with your ARM.